I'm a retired CPA who spent the majority of his working career in technology companies. My work included management stints at Atari Inc, Daisy Systems Corp, Symantec Corp and Visio Corp. My last position at Visio (VSIO) was as CFO and VP Finance and Operations.

A number of states are in the process of pushing new legislation that would increase the use of telehealth services.

The political landscape is ripe with telehealth legislation. As the technology matures and the benefits become clearer, states need to adjust their oversight and reimbursement to ensure they are maximizing the potential of the technology. Here is a round-up of some of the most recent developments.

Idaho endorses telehealth bill

A 31-3 vote in the Idaho Senate passed a bill that outlined acceptable telemedicine practices. The legislation allows the Idaho licensing board to be in charge of the rules and oversight on the services that can be accessed via telehealth. The bill increases access to healthcare, especially in rural areas.

The three votes against the bill came from democratic senators. They opposed some language that would ban doctors from using telehealth for prescribing abortion-inducing drugs. This is a topic that has been heavily debated in other parts of the country.

The bill now awaits the governor's signature.

Florida bill starts house movement

The conversation over a new telehealth bill in Florida has ended as it began moving forward in the house last week. If passed, it would increases the use of telehealth service and reimbursement in the state. It is backed by numerous lobbyist groups that include physicians, insurance and consumers.

According to Rep. Travis Cummings, (R-Orange Park), the house and senate were unable to come to an agreement over a similar telehealth bill last year. The sticking points included standards of care and state licensing. This year, negotiations have been continuous to achieve a compromise.

"Last year we made a good run at it and kind of ran out of time," Cummings said.

Missouri pushing telehealth bills

Missouri House Representative Jay Barnes (R-Jefferson City) introduced Bill 319 earlier this month. It aims to change Medicaid reimbursement regulations surrounding telemedicine services. According to The Missourian, this move will expand access to care for those in rural areas that live long distances from specialists.

"There's a way for Medicaid to save money and get better results for recipients by allowing remote access to medical practice from their homes," Barnes said.

Currently, reimbursement for telehealth services occurs only when rendered from an approved "originating site" and in the presence of an eligible healthcare provider. The bill would add schools and MO HealthNet recipients to the list of approved sites as well as social workers and providers in rural health clinics to the list of approved administrators.

A similar bill has also been proposed by Rep. Kip Kendrick, (D-Columbia), though it focuses on expanded telehealth services in schools.

"What happens right now is many people go without care," Kendrick said. "If they are to receive care, they have to find transportation or Medicaid helps arrange transportation to a specialist in an urban area."

It is fairly common these days to see companies report what they call "NonGAAP earnings" and then go on to disclose what it entails. This reporting trend became quite common after the rules for expensing noncash stock compensation and the changes which discontinued the use of pooling of interests accounting. Both of those accounting transitions held certain benefits with respect to recognizing the economic cost of issuing options or shares to employees for compensation and to reflect the carrying values on the balance sheet at levels more correlated to fair market value.

However, the cost of these accounting changes was to create substantial noncash costs that were charged against earnings, making traditional earnings multiples virtually obsolete. Reporting NonGAAP earnings as a supplemental item is an attempt to overcome the valuation constraints that GAAP unfortunately created. The problem that remains is what adjustments should be made to "appropriately" better measure operating performance and trends of a company. Some abuse this reporting while others like SQNM ignore it.

My objective for creating this supplemental measuring stick for SQNM is pretty simple: I want to have a trendline that helps me gauge operating performance in a way that has long term valuation value. The adjustments I'm making are intended to eliminate nonrecurring or nonoperating components and to more closely show earnings (losses) that more appropriately track cash flows.

My rationale for the adjustments are:

IP litigation spending. Now that the ILMN IP pool agreement and settlement is in place, this spending should dramatically drop. I don't view this as a recurring item that is operating in nature. Adding this spending back would not have been prudent prior to the settlement.

IP pool up front payment of $50M. This is similar to the legal cost elimination. It is a nice infusion of cash but it ultimately reflects a payment for settlement of suits, payment for transfer of technology (1x) and payment for transfer of clinical data (1x).

Restructure costs. This expense was relatively minor in C14 but I'm adding it back to have a better base for trend purposes. If the company has ongoing restructuring in the future I'll reconsider.

Discontinued operations and gain from sale of discontinued operations. Both are self-explanatory. Having an income statement impact from operations that are no longer part of the company makes the adjustment necessary for comparison purposes.

Noncash stock compensation. This adjustment is commonly included in this calculation because the real impact to shareholders is not the "expense" recorded in the financials. The real cost to investors is the dilution created by the issuance which is properly included in the share count.

Income tax provision. The company has a substantial deferred tax asset that is fully reserved. They will have minimal real taxes to pay for many years so the accounting charges/benefits in the tax provision are largely irrelevant to valuation.

It's also important to note that I am not including depreciation or amortization in this adjustment list. Both seem more appropriately included even though they are noncash charges. My rationale is fairly simple. Assets are acquired for cash. The cost of writing them off needs to be included or any long term valuation approach would never reflect the cost of capitalized assets. Normally I would consider intangible assets amortization as an add back, but in SQNM case, they have the IP pooling agreement and these assets will allow them to receive royalties from ILMN going forward. The amortization is an appropriate matching of expense and income in my view so I'm not adjusting for it. Here is the recap for the C14 quarters:

Q1-14

Q2-14

Q3-14

Q4-14

Net income (loss)

$(15,711)

$ 4,453

$(6,078)

$18,311

IP Litigation spending est

4,200

5,300

1,400

1,500

IP Pool (income)

(22,850)

Restructuring costs

910

975

22

Disc operating (inc) loss

(1,378)

995

(1,564)

(Gain)loss sale of disc ops

338

(13,812)

Stock comp

2,957

3,510

2,624

2,428

Income taxes

124

(6,928)

(2,107)

1,235

Non GAAP income (loss)

$ (8,515)

$ (5,507)

$ (4,161)

$ (918)

Non GAAP EPS

$ (0.07)

$ (0.05)

$ (0.04)

$ (0.01)

Note that this is my first attempt and there are estimates that my need to be revised. I'll update this going forward unless the company decides to start reporting it themselves. This trend should prove useful as we look at results for C15.

TCS management provided upbeat guidance on the Q4 earnings conference call, calling for revenue between $390 and $410 million. The top end guidance would represent 14% growth over the C14 results. Surprisingly, they indicated that all this growth was anticipated in the government sector. While seeing the government sector return to a growth phase is a strong positive for the company, understanding what is holding back commercial revenues is just as important.

I chatted with Tom Brandt (NASDAQ:CFO) last week as was able to get a better handle on the reasons. The reasons articulated on the conference call were:

Due to consolidation (Metro PCS) they will be losing a cellular 911 customer revenue contribution effective mid-Q2. That will be a hit of roughly $2m per quarter or $5m on an annual basis.

In Q3 TCS reported a nonrecurring revenue contribution of $4.7m from a settlement of a performance contract dispute.

IP monetization revenues are recorded in commercial systems revenues. I estimate that TCS recorded approximately $2m in C14. During the conference call the company implied they had reduced their forecast to zero for C15 due to a shift in the legal climate.

In addition to these reductions, Mr Brandt indicated that TCS does nonrecurring project engineering or time and material work that they bill out based upon negotiated terms. During C14 they had some of this activity, including with BlackBerry, another handset manufacturer for location application engineering. This work involved the Chinese engineering staff which has now been let go. The combined impact of all of these reductions is expected to largely offset the organic growth in their commercial segment.

Note: The commercial backlog increased by $25 million at the end of 2014 as compared to 2013. That would seem to counter the above as the combined impact of the identified reductions is well below this $25M incremental business.

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